Plexus Corp. — FY2010 Form 10-K
Reporting period: Fiscal year ended October 2, 2010. The filing also reports fourth-quarter results. FY2010 had 364 days versus 371 days in FY2009, which included an extra week.
Business context
Plexus provides electronics design, manufacturing, supply-chain, fulfillment and after-market services, focusing on mid-to-lower-volume, higher-complexity products. Its end markets are wireline/networking, wireless infrastructure, medical, industrial/commercial and defense/security/aerospace. Juniper Networks represented 16% of FY2010 sales; the ten largest customers represented 57%.
Financial performance and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales | $2,013.4 million | $1,616.6 million |
| Gross profit / margin | $206.9 million / 10.3% | $154.8 million / 9.6% |
| Operating income / margin | $99.7 million / 4.9% | $53.1 million / 3.3% |
| Net income | $89.5 million | $46.3 million |
| Diluted EPS | $2.19 | $1.17 |
| Operating cash flow | $2.0 million | $170.3 million |
| Capital expenditures | $74.7 million | $57.4 million |
Fourth-quarter FY2010 sales were $555.6 million, gross profit $56.4 million, net income $26.6 million and diluted EPS $0.65. Sales and earnings increased sequentially during FY2010.
Cash and cash equivalents were $188.2 million at year-end, down from $258.4 million. Working capital was $523.5 million, versus $459.1 million. Inventory rose $170.0 million to $492.4 million; receivables increased $118.0 million to $311.2 million. Inventory turns fell to 4.1 from 4.4, and days sales outstanding rose to 51 from 45. The working-capital build largely explains the sharp decline in operating cash flow.
Term-loan borrowings were $112.5 million; capital lease obligations were $17.4 million. The company had no revolving borrowings and reported $100 million of available revolving credit, with a further $100 million accordion subject to conditions and lender consent. Debt covenants were met. Management believed available cash, operating cash flow, credit and leasing capacity would cover requirements for the next 12 months.
Changes versus prior year
- Sales increased 24.5%, driven by stronger end markets and new program ramps; sales rose in all sectors except a slight decline in defense/security/aerospace.
- Gross margin improved 0.7 percentage points, reflecting higher volume, customer mix and a $3.2 million litigation settlement recorded as a reduction of cost of sales; higher incentive compensation and headcount costs partly offset the improvement.
- Net income nearly doubled. FY2010 had no restructuring or impairment charges, compared with $8.6 million in FY2009, including $5.7 million of goodwill impairment.
- Asia sales grew 57.4% to $925.4 million, and operating income increased to $114.8 million. Europe reported a $1.8 million operating loss, partly due to costs at the new Romania facility.
- Two customers acquired in FY2010 are ending or reducing their Plexus programs. They generated approximately $89 million and $72 million of FY2010 sales; one was expected to disengage by the end of FY2011 Q1, while the other was forecast to taper over multiple quarters, potentially through FY2012.
Outlook, risks and unusual items
- For FY2011 Q1, management forecast sales of $550–$580 million and diluted EPS of $0.56–$0.62 before restructuring or impairment costs, conditional on sales reaching that range. Customer demand, orders and the acquired-customer transitions could change results.
- Management expected an FY2011 effective tax rate of approximately 3%–5%. Its longer-term goals included compounded annual revenue growth of at least 15% and ROIC 500 basis points above estimated WACC; the internal WACC estimate was reduced to 13.5% from 15.0%. FY2010 ROIC was 19.5%.
- Key risks include customer concentration and nonbinding forecasts, program cancellations and transitions, inventory exposure under turnkey arrangements, component shortages and price increases, start-up costs and expansion execution, international and currency exposure, competition, and regulatory and product-liability risks.
- Planned FY2011 capital expenditures were approximately $100 million, including expansion in Malaysia and anticipated construction in Romania and China. Expansion costs and utilization could pressure margins and cash.
- U.S. Customs and Border Protection was reviewing import activity; Plexus reported errors covering July 2004 onward and awaited a final determination of duties and fees. Management did not expect a material financial effect. A supplier’s nonconforming inventory was expected to create up to $1.1 million of expense, with partial recovery sought in FY2011.
- Plexus held $2.0 million of auction-rate securities backed by guaranteed student loans, maturing in 2042, and warned that deterioration in credit quality could require impairment. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion.
Important facts for investors to verify
- Whether operating cash flow recovers as inventory and receivables normalize, and whether customer deposits adequately mitigate inventory risk.
- Actual FY2011 sales and earnings impact from the two acquired customers’ program exits, relative to management’s forecast.
- Execution, cost and returns from the planned Malaysia, Romania and China expansions and the approximately $100 million capital-spending plan.
- Final CBP duties, fees or penalties, and recovery from the supplier related to nonconforming inventory.
- Sustainability of the unusually low 1% FY2010 effective tax rate and the effects of foreign tax holidays and tax-law changes.